Metro Inc. has decided to raise additional capital by issuing $170,000 face valu
ID: 2532305 • Letter: M
Question
Metro Inc. has decided to raise additional capital by issuing $170,000 face value of bonds with a coupon rate of 10%. In discussions with their investment bankers, it was determined that to help the sale of bonds, detachable stock warrants should be issued at the rate of one warrant for each bond sold. The value of the bonds without the warrants is.considered to.be $136,000, and the value of the warrants in the market is $24,000. The bonds with stock warrants sold in the market at issuance for $152,000. Each stock warrant can purchase two shares of Metro's S2 par common stock at S40 per share. 1) What entry should be made at the time of the issuance of the bonds and warrants? 2) What entry should be made if all stock warrants are exercised when the stock price is S50 per share.Explanation / Answer
Face value 170,000 Rate 10% Bonds without warrant 136000 Warrants 24000 Issuance value 152000 Value to be assigned to bond=(issuance value/(value of bond+value of warrant))*value of bond 129200 (152000/(136000+24000))*136000 Value to be assigned to warrant=(issuance value/(value of bond+value of warrant))*value of warranr 22800 (152000/(136000+24000))*24000 a) Cash 152000 Discount on bond 40,800 Paid in capital -Stock Warrant 22800 Bond Payable 170,000 b) Cash 136,000 (1700*2*40) Paid in capital -Stock Warrant 22800 (original transfer amount) Paid in capital commn stock 152,000 balancing figure Common stock 6800 (1700*2*2) note:assumption face value per bond is $100. so number of bonds =170000/100=1700